What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Shanghai Aohua Photoelectricity Endoscope's (SHSE:688212) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shanghai Aohua Photoelectricity Endoscope:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.039 = CN¥54m ÷ (CN¥1.5b - CN¥117m) (Based on the trailing twelve months to December 2023).

Therefore, Shanghai Aohua Photoelectricity Endoscope has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.2%.

In the above chart we have measured Shanghai Aohua Photoelectricity Endoscope's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Aohua Photoelectricity Endoscope .

The Trend Of ROCE

Shanghai Aohua Photoelectricity Endoscope has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Shanghai Aohua Photoelectricity Endoscope is utilizing 252% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On Shanghai Aohua Photoelectricity Endoscope's ROCE

To the delight of most shareholders, Shanghai Aohua Photoelectricity Endoscope has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 12% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 688212 on our platform that is definitely worth checking out.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.